August 6, 2012To the average consumer, car insurance can seem pretty arbitrary. What you get charged often depends more on where you drive than how you drive.

John Egan of InsuranceQuotes.com says it's very often about location, location, location. Two people, he says, can live in two different zip codes in the same city "and pay a substantially different amount of money, depending on exactly where [they] live in your community."

How much a driver pays also varies widely from state to state. State laws about personal injury and liability go into the mix, along with a whole host of other factors.

"In the Detroit area in particular, there are a lot of uninsured drivers," Egan says. "And when you've got more uninsured drivers, that tends to drive up the cost for everybody who does have car insurance."

A Whole New Pricing Model

But while those pricing swings from zip code to zip code are well-entrenched, there's also a big change under way in the car insurance business, as advances in technology transform how the industry functions.

"There's always been a lot of competition for auto insurance," says Bob Passmore, a senior director with the Property Casualty Insurers Association of America and a 30-year industry veteran. "But I think the way that insurers do business, and the way that they advertise their business, has changed."

One result — car advertising has proliferated on television.

But there are other shifts under way, as well. The recent recession, says Passmore, means there are fewer new cars to insure.

At the same time, the Internet is making it easier for consumers to find the lowest price — just as insurers are streamlining their practices with new high-tech tools.

"For the first time ever, we can now go in as an industry and observe individual driving behavior," says Richard Hutchinson, a general manager with Progressive Insurance.

"Historically, the industry has priced based on modeling, which is more arbitrary than an individualized quote based on one's actual activity," Hutchinson says.

But today, Progressive can put a device in your car that determines how well you drive — tracking if a driver frequently slams on the breaks, for example.

With that data, the company can then determine how much that driver should pay for insurance. Other companies are now following suit.

Better Rates, But At A Price

These kinds of advances are the cutting edge of the business, and companies are even moving from devices that track not just how you drive, but also tell you when you're doing something reckless or dangerous.

Dave Ferrick of Agero, a company that makes these types of in-car devices, says all technologies have trade-offs.

"The analogy I give is when we were all kids," Ferrick says. "If your mother said to you, 'You're going to go out right now [and] I'm going to put this thing in your hand, which [means] at any second I can call you, and you have to pick up the phone,' I would say, 'I don't want it.' "

Just like the cellphone took away some freedoms, Ferrick says, drivers will lose some freedom as technology advances.

"I can save you some pretty serious dollars on your premium," he says. "Are you willing to sacrifice, knowing that somebody is not watching where you drive, necessarily, but how that car is being driven?"

Thus far, only a small fraction of drivers have installed the tracking devices in their cars. For its part, the industry says tracking is the way of the future — and giving up freedom is the only way to save money.

No breach of privacy laws expectation or anything if the owner of the vehicle gives the company permission to install the device, although it may require some form of disclosure to the driver.

The way this would come in is by the insurance companies offering significant discounts if you have one fitted & once enough people have done so, it will become economically difficult for the remainder to resist.

My concern is whether the device can actually tell whether you are driving safely - eg the driver that crosses an unbroken line to be well clear of a cyclist he or she is passing will be picked up, but not the driver who squeezes past 3 inches from the cyclists elbow.

I'm intrigued by this. Not so much the privacy issues, but more the effect on driving styles. If you know your insurance premium is linked to how hard you accelerate, stop and corner you'll probably (in general) be much more gentle with all of these things. The net impact could well be a reduction in accidents and fuel consumption. Don't know, and I'm not advocating it but it has an interesting angle.

The other thing is, lets suspend belief for a second and assume that we all of a sudden all become lovely drivers with doilies on the rear parcel shelf and white wall tyres... Do your premiums go down? Of course not - we're all the same risk as a percentage of the population in general, so we all pay the same (as the insurance companies certainly aren't doing this to decrease revenue, just expenses) but enjoy the sensation of being monitored constantly.

Ozkaban wrote:The other thing is, lets suspend belief for a second and assume that we all of a sudden all become lovely drivers with doilies on the rear parcel shelf and white wall tyres... Do your premiums go down? Of course not - we're all the same risk as a percentage of the population in general, so we all pay the same (as the insurance companies certainly aren't doing this to decrease revenue, just expenses) but enjoy the sensation of being monitored constantly.

in theory, if we "all of a sudden all become lovely drivers", the costs to insurers would also go down. this would allow them to reduce premiums. it's not a zero sum game.

it's call price signals - using prices to positively influence more efficient behaviour. most people just think of prices as the nasty side of procuring a product and wish they were lower.

I struggle to be convinced that insurers want lowered premiums. Ultimately their margin is a percentage on premiums. What they don't want is fatalities, because dead people don't continue to pay premiums.

I would really, really, really like to see 3rd party insurance costs tied to accident and claim record, or even better a recovery requirement for (NSW) an at fault driver in NSW - ie the insurance should be there to protect the victim against the financial circumstances of the driver, rather than what it currently does which is indemnify the driver - which leads to irresponsibility regarding the threat of the motor vehicle to vulnerable road users.

A "portfolio business" B2B company I worked for 15-20 years ago had procured rights to a black box GPS technology that would allow stolen cars to have their locations identified. It was pretty bulletproof and foolproof, and relatively inexpensive.

trailgumby wrote:A "portfolio business" B2B company I worked for 15-20 years ago had procured rights to a black box GPS technology that would allow stolen cars to have their locations identified. It was pretty bulletproof and foolproof, and relatively inexpensive.

TG - interesting as car theft has reduced considerably with the advent of engine immobilisers. the problem with those proposals is that they invariably require a discount on insurance premium. if you have say 10,000 discounted premiums and save 50 thefts, then you can quickly calculate if, as the insurer, you've saving or losing money. the point being, while an insurer has an incentive to reduce car thefts - it's not at any cost.

a classic example is agreed value insurance policies. justice depts have been screaming for years for insurers to stop issuing these, as they are a magnet for insurance fraud. last i checked you can still get them though - insurers just make more off the premiums than they lose off fraud. they are surely well aware of the problems. the cost to tax payers of prosecuting fraudulent policy holders is exorbitant - but the insurer doesn't bear that and doesn't care.

trailgumby wrote:A "portfolio business" B2B company I worked for 15-20 years ago had procured rights to a black box GPS technology that would allow stolen cars to have their locations identified. It was pretty bulletproof and foolproof, and relatively inexpensive.

It was shopped to all the large insurance companies.

The response was decidedly cool.

They didn't see any value-add.

Because if everyone had these black boxes a lot of people probably wouldn't bother to insure their car so no income/profit for insurance companies.

No claim bonuses are affected by driving skills already - this is just another level of the same. There are privacy issues in relation to the questions you are asked when you take out insurance in the first place... the US Supreme Court is not a place to find challenging acts in the defence of the American public - it is a place to find acts of cowardice hiding behind the US Constitution as an excuse. Look at their inability to ban Nazi rallies and the Westboro Baptist crew at military funerals... spineless. Do you have to point a gun at someone to ensure you have some dignity and civility at a FUNERAL?

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